Saturday, January 30, 2010

Sovereign Debt Panic

In a bid to goose their economies, governments are spending with abandon, and now — even before any appreciable effects have been realized — they suddenly realize that they have spent themselves into a corner. Now, wallowing in debt and with unprecedented debt-to-GDP ratios staring them in the face (see previous post), everyone is starting to panic. Privately at least, they are asking: What if we can’t pay off all this debt? I’ve made no secret of my belief that all that debt cannot be paid, because that would require some really hot economic growth worldwide, which in turn would necessitate a copious supply of cheap energy and resources.

And then there’s China. Everyone is raving about its economic growth, but China has been pumping up a reallybigbubble. If it deflates suddenly (good possibility), it will be more like an explosion than a pop. There is a colossal amount of non-performing real estate assets in China (vacancy rates in Shanghai’s Pudong district are as high as 50%), and a mountain of debt piled up because obviously real estate developers have borrowed heavily to build all those office buildings and condominiums.

So, amigos, it’s about time people started to panic. Keep a watch on the situation and have an emergency bag packed at all times.